Cheques & Balances

The discussion should have ended after members of the CII adopted the code at the end of a year long debate on the subject it was now time to practice better governance. Annual reports trickling in this year show that some top companies have included statements regarding the extent of compliance with the CII code. But the adoption of a best practices code has hardly led to a dramatic improvement in accountability of the corporate sector. The corporate black sheep continue to hide facts, dodge investigations, lobby for politically engineered bailout of theirlarge and beleaguered operations and languish on the stock market. So what was the UTI debate expected to achieve?

The unstated agenda at this `closed door’ meeting was to debate UTI’s demand for board representation on the 100 top company boards and its plans to insist on a supervisory board for Infrastructure Leasing and Financial Services (IL&FS). Both moves had led to angry protests, which were powerful but privately conveyed to the government. The bureaucracy clearly wanted a first-hand evaluation of the issue. However, as is usually the case at such meets, there was little discussion and very limited frankness.

The corporate sector, of course, opposed UTI’s demand for board representation. A day after the meeting, UTI decided not to press its case with at least two major corporate houses and has announced that it wouldn’t insist on representation if it is convinced that the management is protecting their interest as investors.

However, the round-table raises several related issues — the first isregarding UTI’s own commitment to good governance. While UTI has been making demands for board representation on companies, UTI itself was reluctant to follow the same rules. The Parekh report was released only a day after the `closed door’ meet. The full report, first disclosed by this paper, only demonstrated how much UTI has left hidden in the three-page summary released to the press earlier. The summary was not an executive summary of the report, but facts chosen by UTI, even though most of the Parekh panel findings were merely an official confirmation of criticism about UTI over the years. The reason for suppressing the full report was apparently a fear that the disclosures would lead to another run on units before the book closure. Clearly the logic is suspect. The massive Rs 4,800-crore bailout through the Special Unit Scheme 98, the generous tax breaks which have revived the mutual fund industry and the availability of a line of credit from the RBI were adequate protection against a run onunits.

Even today, UTI’s announcement of restructuring measures is far from adequate. The appointment of independent directors on its board; strengthening of its asset management company for Unit 64 and its willingness to comply with the SEBI rules is only a beginning. It still needs to disclose the exact state of its “questionable” debt portfolio, as demanded by the Parekh report. It needs to appoint separate and independent teams of fund managers of every single scheme and decentralise its operations — the announcements made so far do not indicate a comprehensive change. UTI is expected to cut repurchase price and dividends, but it is still not clear how it will tackle the outflow of corporate holdings when that happens. UTI has yet to appoint an independent professional firm to review its asset management processes including back office, inter-scheme transfers etc. It has only appointed a couple of CAs on its board of trustees.

Having said that, what can be done to take the issue of corporategovernance a little beyond the adoption of the CII code? The issue of appointing institutional nominees, as suggested by UTI is fraught with problems. A senior former institutional executive says that employee nominees are no solution.

Firstly, there aren’t enough senior managers to be appointed. Secondly, more junior managers, if appointed, neither carry weight nor are able to forcefully argue issues. Moreover, such nominees do not even have the incentive of meagre sitting fees paid to other directors. As for independent directors, the institutions’ experience is that they rarely take serious interest in the affairs of a company or submit detailed reports, because they are not paid. The sitting fees of Rs 2,000 per meeting are no incentive. The increased compensation to independent directors will also have to be accompanied by some restriction on the number of directorships. Papers circulated at the seminar indicate that the number of directorships a person can hold varies from 2.6 to 10.

A simpler wayof improving corporate governance is to empower shareholders. Companies only pay lip-service to the rights of shareholders. The demand for postal ballots is a good example. This would ensure that companies do not pass catch all resolutions, which empower it to merge, divest, expand into unrelated areas and make investments, which have badly eroded shareholder value. Another area that needs to be examined is with regard to the on-going disclosures by companies to bourses, under the listing rules. Matters which have a material bearing on the stock prices continue to be suppressed by companies. Sometimes these are revealed only through media exposes and stock exchanges do not have adequate powers to initiate disciplinary action.

Empowering bourses would also force better disclosure and practices by companies. Finally, corporate governance is all about the attitudes of individual managements. The practices of a Infosys Technologies or HLL are never going to be adopted by thousands of others. Ultimately, themarket valuation of companies will always highlight the difference.

Author’s email:suchetadalal@yahoo.com